Iran’s housing sector keeps building

Iran’s housing sector is on track to escape its yearslong stagnancy, yet Iranian tenants are still squeezed by rising rents.

REUTERS/Raheb Homavandi/TIMA

Laborers work at a building construction site in Tehran, Iran, Jan. 20, 2016.

In Iran, the housing sector — which accounts for a hefty 35% of all household expenses — has since 2011 been in the grip of its worst recession in recent history. Indeed, it was the only sector not to rebound after sanctions were lifted with the implementation of the Joint Comprehensive Plan of Action (JCPOA) in January 2016. But long-awaited gradual signs of a comeback have been seen in the past year, though prospects of a full recovery are now in thrall of developments in other Iranian markets, which are closely tied to the fate of the nuclear deal.

According to the Statistical Center of Iran, the construction sector — which includes residential units and other buildings and infrastructure — began registering positive growth rates from the start of the previous Iranian year beginning March 20, 2017. Furthermore, permits issued for the construction of residential units indicated growth that was not considerable on a countrywide scale, but was more accentuated in the capital Tehran, which saw a 10.6% hike.

On the other hand, a study of the volume of home deals across the country, registered by the Ministry of Roads and Urban Development, signals stronger demand compared to previous years, while Central Bank of Iran (CBI) data indicate that Tehran registered its highest volume of deals in recent years during the final month of the third quarter of the previous Iranian year to Dec. 21, as it showcased a 50% year-on-year surge.

What's more, numbers for Tehran and other cities clearly register considerable price hikes for residential units that go well beyond the inflation rate of 9.6% registered for the previous fiscal year. Even as the inflation rate is expected to rise to double digits again this year, it will come nowhere close to the massive average price jump of 30% registered in Tehran in the first month of the current fiscal year to April 20. Iran's housing affordability index has grown in recent years, but not to an extent that would fully answer for price jumps of this magnitude.

Tenants, especially those living in Tehran, are also expected to brace for a hard year as Iran's bustling capital city registered an average rent growth rate of 20% last year, which was the highest in four years.

Because all telltale signs of an impending boom were present, the majority of 30 prominent housing officials and experts recently surveyed predicted that the warming trend of home deals would continue, albeit with a softer trajectory, and that the current situation would be maintained rather than the sector going into a full-fledged boom phase. They also overwhelmingly opined that real demand would be for relatively cheap residential units with areas of 70 square meters or less, and referred to potential changes in bank interest rates and parallel markets — foreign exchange and gold — as the most important factors affecting the housing market in the current fiscal year.

According to Mohammad Mahidashti, a macroeconomic analyst currently serving as an expert at the Ministry of Economic Affairs and Finance, the housing relative price index — calculated by dividing housing expenses by the consumer price index — is another good indicator of how Iran's housing sector is faring at the moment.

"My studies show that the index underwent a declining trajectory from 2008, way before the tenure of the current administration [which began in 2013], but slowly showed signs of ending that trajectory from April 2017," he told Al-Monitor.

As he pointed out, that was when prices started growing more notably, especially in urban districts that attracted the highest volume of home deals, and the housing sector experienced meaningful added value.

Mahidashti is also of the belief that the change in bank interest rates (which were forcibly capped at 15% by the CBI in August) was immensely helpful to the housing boom, especially in Tehran, as it decreased the attractiveness of risk-free deposit accounts and redirected capital toward the housing market.

But the CBI was forced to make an about-face only a few months later. The rial continued to weaken because of both the severe uncertainty created by Donald Trump prior to his withdrawal from the JCPOA and the unstoppable speculative activities driven by psychological effects of potential worsening conditions.

Before the government was forced to unify the country's dual foreign exchange rate regime on April 10, the CBI in mid-February temporarily allowed banks to offer one-year bank deposit certificates carrying 20% interest rates, which attracted a hefty 2.4 quadrillion rials ($57.15 billion) in only weeks. After that, bonds with interest rates of 20.5% were issued, which effectively kept bank interest rates at previous levels. Meanwhile, foreign exchange rates are still rising in Tehran's markets, with the US dollar trading at around 65,000 rials, a far cry from the unified 42,000 rial rate.

These developments have adversely affected the housing market, robbing it of much-needed capital while ramping up prices of construction materials.

"It is possible that because of these contractive policies, the growth of the housing sector will hit a standstill in 2018," Mahidashti told Al-Monitor.

On the other hand, he referred to Iran's ever-rising liquidity, which stood at close to 15 quadrillion rials ($357.15 billion), according to latest statistics, as another important factor that will exert its influence one way or another. Mahidashti said it will spur demand in the housing sector, though mostly among the upper deciles of Iranian society, since people with lower incomes — who account for the majority of real housing demand — still face many hurdles.

"It seems that the purchasing power of consumers has failed to increase in a manner that would create a momentum in the lower income levels of the market," he added.

Mahidashti is, like many others, also less than optimistic that the housing sector will fulfill its maximum boom potential this year. But he sees a better future for it in the final years of Rouhani’s presidency, which ends in 2021. One reason is that "the housing sector at the moment is different than the sector of the previous decades, in that it has no shortage of supply and everything rests on the demand side," said Mahidashti, referring to the more than the 2.6 million homes that were vacant last year, more than half a million of which are located in Tehran alone.

Last but definitely not least, even as the housing sector is thought to be the most resilient to the impacts of the US withdrawal from the nuclear deal and Trump’s promise of returning sanctions, it is also liable to take a hit, as will other parts of Iran's economy, as one of the worst conceivable scenarios for the JCPOA has come to unfold.

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